Morgan Stanley’s Steve Roach writes about the timidity of the European Central Bank.

Incrementalism doesn’t work in combating deflation. That was one of the key lessons that the research staff of the Federal Reserve drew in a widely noted paper published last year…Yet that’s precisely the approach now being followed by the ECB. The 25 bp easing of 6 March is but the latest case in point — it is only the sixth easing in two years, bringing the cumulative reduction in the Euroland policy rate to 225 bp since May 2001. Yet the European economy is now in very serious economic trouble.

I think that the Fed is being equally timid here in the United States. Consider this story on the latest employment figures.

Friday’s report means the 12-month net change in private payrolls has been negative for 20 straight months, extending the longest stretch of labor-market pain since 1944-46. Private payrolls are now 2.5 million jobs lower than they were in March 2001, when a recession began.

These job losses do not reflect weakness in productivity or aggressive wage demands. They seem to me to reflect a shortfall in aggregate demand. In my view, the Fed sees two-sided risks (if it eases too much, it may feed the housing bubble, or weaken the dollar, or bring short-term interest rates too close to zero, or create some other imagined peril) when the risks are only one-sided: without sufficient monetary stimulus, the U.S. economy is producing well below capacity.

For Discussion. There is uncertainty about the cost of a possible war in Iraq and its aftermath. Does the case for monetary stimulus depend on how this uncertainty is resolved?